Market Profile

Innovative Portfolio Management Software
for Successful Traders, Investors
Business & Educators

TOPIC CONTENTS

1. What is market profile?
2. Constructing the market profile.
3. Articles and white papers.

What is Market Profile?
Market profile is a method which has been used by market participants to obtain a better feel for the movement of the overall market. Initially used only for futures markets, it methodology is easily adaptable to equity and other markets.

The basis for market profile is to determine the movement of the market based upon a standard distribution of trades at various price levels throughout the trading day. The technique is as simple as plotting the prices at which a security trades during various time periods of the trading day.

Market profile was developed by J. Peter Steidlmayer in the 1980's in conjunction with the Chicago Board of Trade. Those traders which use market profile believe that they can get an in-depth understanding of the market. Initially market profile was used by floor traders on the various futures exchanges however it is common to find data providers which supply market profile data for futures and equity markets.

Market profile does not act as a buy/sell tool, it only acts as another element which aids the decision making process, It tries to identify the level in the market which represents the best value (fair value) for a trade.

This page provides an overview of market profile.

Constructing the Market Profile

Based upon a standard distribution and the bell curve, market profile identifies possible strong and weak points in the trading activity of a security during the trading day.

To start constructing a market profile chart we basically make a plot of all trades which occur at various prices for various time periods during the day. Shown in the picture below is the bell distribution curve (turned onto its side), this forms the basis forthe market profile chart.

Market Profile

For a particular trading day we might decide to divide the day into half-hour segments. Each half-hour segment is assigned a letter, starting with the letter 'A' for the first trading period, "B" for the second and so on.

A plot of the letter 'A' is made on the chart which corresponds to the price at which the security trades during the current time period. After the first time period elapses you move to the letter 'B' and so on until the trading day is complete. At the end of the trading day you will have a market profile chart which looks like:

Market Profile

		Want to learn more?
		If you are interested in learning more about Market Profile please download and read the various articles and white papers which we have made available.

		Market Profile Basics (472KB)
		Author:	Jayanthi Gopalakrishnan
		Date:	2002
		Synopsis:	Perfect article to learn how to master the Market Profile.
		Complexity:	Beginner

		Introduction to Market Profile (117KB)
		Author:	Peter Steidlmayer, Ted Hearne
		Date:	1994
		Synopsis:	Learn about market profile and capital cash flows into the market from the man that developed Market Profile in the 1980's.
		Complexity:	Advanced